I am considering replacing the company cars used by my employees with electric or hybrid cars as I have been advised that they are more tax efficient than petrol/diesel cars. Is this correct?
There are a number of tax benefits available on the purchase of an electric/hybrid car.
The first point is that HMRC has no special VAT breaks for electric cars and hybrids. There is no difference in the VAT recovery position for the purchase, or the lease, of electric, diesel or petrol fuelled vehicles. VAT incurred on the purchase of a car is only recoverable where the car will be used exclusively for a business purpose i.e. is only used for business journeys and not available for the private use of employees (e.g. home-to-work journeys). Where a business leases a qualifying car, 50% of the VAT on the leasing charge is irrecoverable. However, where a separate charge is made for the maintenance of the leased vehicle, the VAT on that element is recoverable in full.
The main tax break is on the motoring scale charge. The rules are exactly the same for electric and hybrid cars as for those powered by fossil fuels, however the savings come from the fact that the scale charge is based on CO2 emissions and as electric cars produce no CO2 they don’t pay the scale charge. Hybrids will pay a scale charge, but because of the reduced CO2 emissions the charge will be lower than for conventional cars.
Vehicle excise duty (road tax) is based on CO2 emissions – therefore electric cars are exempt from paying this duty. Hybrid models are placed three to four tax bands lower than would otherwise be the case as the CO2 levels are reduced by around 20%-25%
When a company car is made available for private use, a benefit-in-kind rate is calculated based on the car’s value and its CO2 emissions. Electric vehicles are rewarded with lower BIK rates 13% for FY 2018/19, increasing to 16% during 2019/20 and then reducing to only 2% for FY 2020/21. From April 2018, plug-in hybrids with CO2 emissions up to 75 g/km are BIK-rated at 13% to 16% (depending on CO2 emissions), with rates increasing by 3% for FY 2019/20.
New business cars with CO2 emissions of less than 95g/km are eligible for enhanced capital allowances (ECA) which allow you to set the whole cost of the asset against taxable profits in the first year following purchase. All electric cars and several hybrid models have CO2 emissions under the relevant threshold and this tax relief can lead to significant savings in corporation tax within the year of purchase.
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